Trying to sort out what happens if a public utility goes bankrupt

The clock is winding down on Public Service Company of New Hampshire (PSNH). Not since the 1930's has a regulated public utility gone bankrupt. But two-and-a-half weeks ago, the lead partner in the Seabrook nuclear power project was given three weeks to come up with a new $300 million line of credit. If it could not, ''the company would be forced to seek protection from its creditors under the Bankruptcy Code,'' stated the accounting firm of Peat, Marwick, Mitchell & Co. in PSNH's annual audit. (Related story, Page 8.)

PSNH is not alone. Long Island Lighting Company (Lilco) and Public Service Company of Indiana have also indicated that their financial straits could force them into bankruptcy to seek protection from creditors.

What happens when a regulated utility goes into bankruptcy? No one is certain. There is no provision for it in the Bankruptcy Act of 1978.

''If a utility goes bankrupt, there is no short-term noticeable effect on service to customers. Bankruptcy may not seem like such a bad idea, which would raise the level of risk for utilities (and their stocks) across the country,'' says Doug Randall of the Standard & Poors, a Wall Street bond-rating service.

Typically, when a company files for bankruptcy under Chapter 11, the court protects the firm from creditors and litigation while it adjusts its business operations in order to pay off creditors. But for a utility, the scenario is muddled by a third power - the state utility regulators. This body is charged with setting the utility's rates and protecting the consumer from company excesses. If a company wants a rate increase, it must prove to the commission that it warrants it.

If bankruptcy occurs, a conflict may arise over the court's charge to rehabilitate the company and the state regulator's charge to protect the consumer.

In PSNH's case, an nuclear power plant is worth relatively little unless complete. ''If the bankruptcy court is persuaded that Seabrook I (nuclear power plant) is essential to PSNH's continuance, (PSNH) may seek to direct revenue toward the completion of the plant,'' says Robert Viles, dean of the Franklin Pierce Law Center in Concord, N.H.

If state regulators refused to raise electric rates when asked by the court, it's not clear what would happen.

In New Hampshire, the problem is further exacerbated by a law passed in 1979 that prohibits charging ratepayers for construction work in progress.

Would the bankruptcy court be able to overrule that law to save the utility? ''The public utility commission's authority would remain intact. Bankruptcy laws don't abrogate state laws,'' says Mike Holmes, a lawyer and consumers' utility advocate for New Hampshire.

Vernan Countryman, a professor at Harvard Law School, agrees: ''They won't be able to get around the cost-of-work-in-progress law. And it doesn't seem to me that PSNH is going to get away from state regulation.'' Mr. Countryman cites two sections of the Bankruptcy Code that give preeminence to state laws.

Mr. Holmes says he sees other conflicts arising between the court and state regulators. For instance, if the commission sees the need to invest in upgrading service while the court is trying to preserve the utility's assets, ''we may end up with a problem,'' he says.

What happens to the utility's investors? As in most bankruptcy cases, the outcome is not promising. ''Typically, stockholders interests are diluted to as low as 2 percent of the company,'' says Stephen Gordon, senior partner of McCabe-Gordon, a Boston law firm specializing in bankruptcy. Common-stock holders are left with watered-down shares, while bond and preferred-stock holders trade a supposedly secure investment for a ''basket of (less valuable) securities,'' he says.

The securities market for utilities mired in nuclear-plant construction has not exactly flourished since the Washington Public Power Supply System defaulted on its bonds last summer. A bankruptcy would send utilities' stock and bond prices even lower, say New England utility executives working to save Seabrook I.

This is why Indiana regulators chose rate increases. ''For now, it would be more cost-effective to the consumer if Public Service of Indiana didn't go bankrupt,'' says Charles Mercer of the state's Office of Utility Consumer Counselor.